High Stakes Showdown: Internet Gambling Debate Rages on Capitol Hill

May 19, 2010

By RICH BLAKE

With just two weeks to go before a federal law aimed at quashing Internet gambling takes effect, a handful of House Democrats, including Rep. Barney Frank, D-Massachusetts, are going all in, pushing for the legalization of some of the most popular forms of online gambling. The lobbying is intense, and the stakes are high – by some estimates the Internet gaming industry generates as much as $6 billion a year in profits – and no one on either side of the debate appears ready to fold.

Meanwhile, in an exclusive interview with ABCNews.com on Tuesday, Rep. Spencer Bachus, R-Alabama, the Ranking Member of the House Financial Services Committee, said he would do everything in his power to stop the legalization of Internet gambling, specifically singling out online poker.

"Internet gambling is the crack cocaine of gambling," Bachus told ABCNews.com. "Young people are particularly vulnerable – we don't want to put a casino in every dorm room in the country. Compulsive gambling, by many accounts, is a very serious, growing problem."

Among the many recent developments in this ongoing battle royale:

Rep. Frank, the powerful chairman of the House Financial Services Committee, is scheduled to appear today before the House Ways and Means Committee. He will testify on the federal tax revenue implications of legalized online gambling. Depending on which side produces these estimates, tax revenues from online gambling could range anywhere from $10 billion over ten years to more than $800 billion over five years. Frank is sponsoring HR 2267, the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, to establish a framework for the legalization of online poker and other casino-type gambling.

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The Poker Players Alliance, a Washington, D.C.-based lobbying organization, petitioned the Federal Reserve and the Department of the Treasury to exempt online poker venues from the Unlawful Internet Gambling Enforcement Act, which takes effect June 1. Passed by a Republican-controlled Congress in late 2006, the act prohibits the use of any banking instrument -- such as a credit card, check, or electronic funds transfer -- from being used for illegal online gambling transactions.

Implementation of the law has been subject to numerous delays, including a six-month postponement granted in November by the Fed and Treasury, partially at the behest of Rep. Frank and Sen. Harry Reid, D-Nevada.

Last week, a cadre of GOP lawmakers, led by Rep. Bachus, wrote to Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner, strongly urging them to deny the PPA's eleventh-hour bid to redefine what constitutes illegal gambling so as to clear the way for banks to do transactions with online poker sites.

Al D'Amato at the Table

Defenders of online poker, specifically the PPA, argue that everyday citizens should have the right to enjoy a simple American pasttime, regardless of whether they are in the backroom of a barbershop, or in cyberspace.

"Why is it OK for a group of friends to sit around the kitchen table and play a friendly game of poker, but not OK for people to play over their computers?" asked former New York State Republican Senator Alfonse D'Amato, now the chairman of the PPA.

D'Amato, an avid poker player who held weekly games in the Senate, sometimes while waiting for bills to come to the floor, said peer-to-peer gambling, as opposed to sports betting, does not violate any existing federal laws prohibiting forms of wagering. For example, he said, the Interstate Wire Act of 1961 is expressly aimed at outlawing bets on sporting events.

Sports betting operations and online poker sites have been able to operate in offshore locales such as Costa Rica or the Isle of Man, a U.K. territory. The latter is home to PokerStars.net, which, according to Forbes magazine, earns an estimated $500 million in profits annually. Also among the most popular online poker sites are Full Tilt, Absolute Poker and Doyle's Room. Fuelled by the explosion in popularity of Texas Hold 'Em and televised events such as the "World Series of Poker," online poker has become a booming industry over the past decade.

By some estimates anywhere from 3 million to 15 million Americans play poker online for money

The new law about take effect June 1 should effectively cripple the online poker industry by making it exceedingly difficult for individuals to use their credit cards to participate in these games, Rep. Bachus said.

But PPA director John Pappas insisted that the official June 1 compliance date, known in some circles of the online poker world as "D-Day," will have little impact on the industry, regardless of whether online poker gets the exemption the PPA is seeking.

That's because many financial institutions have already begun to block online poker transactions before the law formally takes effect, in turn prompting many players to get credit cards from overseas. In other words, gaming enthusiasts have already figured out how to game the restrictions.

Moreover, the new law doesn't specifically ban banks from transacting with online poker sites; rather, it merely requires the banks to take proper steps to make sure that they do not facilitate any illegal gambling transactions.

"There is what amounts to a safe harbor already embedded in the law, so that any bank that does want to transact with an online poker business simply needs a reasoned legal opinion that it their client is not involved in restricted transactions," Pappas said.

Legal Gray Area

And since the Wire Act, which predated the Internet era, doesn't expressly ban online poker, creating what legally amounts to a whole lot of grey areas, such opinions will not be hard to find.

Professor I. Nelson Rose, who runs a consulting business and website called GamblingandTheLaw.com, said he has already issued several such opinions on behalf of financial institutions seeking such safe harbor clarifications. Rose said he thinks the UIGEA is a silly waste of the government's time and resources.

"Online gaming will continue to flourish long after this new law takes effect," he said. "All it really does is create a new due-diligence standard and establishes safe harbors, so if anything it will encourage more online gambling operations." Proper regulation is the key to preventing fraud and abuse, not outright prohibition, Rose said.

Several forms of online gambling are currently legal in the U.S., including state lotteries and Native American tribal activities, which are governed by the Indian Gaming Regulatory Act. Two dozen or so states allow for "advanced deposit wagering" for online betting on horse races as well as dog races and jai alai, according to Rose.

If Rep. Frank's effort to legalize online gambling gains any traction, it might be because the federal government needs more tax revenues, not because lawmakers want to protect individuals' rights to entertain themselves.

A separate, companion bill to Rep. Frank's proposed legislation has been introduced in the House by Rep. Jim McDermott, D-Washington. His Internet Gambling Regulation and Tax Enforcement Act is specifically aimed at capturing the potentially-sizable amounts of tax revenue that the government could collect if online gambling became a legal, regulated industry.

A report by the Joint Committee on Taxation analyzed a few scenarios and deduced that it is possible for around $42 billion in tax revenues to be generated over ten years, though this estimate assumes that most states and sovereign tribes opt in to the federal framework for legalized online gambling, when many could actually decied to opt out.

Regardless of the potential windfall to federal coffers, "the American government does not need to become addicted to gambling revenue, because that will only lead to more gambling and hurt more people," Rep. Bachus said.

The PPA's Pappas and D'Amato both agree that the desire to boost federal coffers from gambling revenue should not drive the debate.

Safeguarding Against Schemes

"Having a safe, well-regulated industry that safeguards against things like cheating scams and underage gambling should be the focus here, not some tax revenue push," Pappas said.

While proponents of online poker, such as D'Amato, support the efforts of Rep. Frank and Rep. McDermott and are hopeful about their passage, they also recognize that other pressing issues, such as Wall Street reform and possibly immigration reform, will surely dominate the remainder of the session.

Meanwhile, the Justice Department and other law enforcement officials have made their position known: online gambling in all of its many forms is illegal.

In a Nov. 13, 2009 letter sent to Rep. Bachus by Shawn Henry, assistant director of the Federal Bureau of Investigation's Cyber Division, on behalf of F.B.I. director Robert Mueller, Henry spelled out concerns over the use of online poker sites by parties engaged in money laundering activities, setting up what amount to private "shell games" with cohorts serving as "mules."

In written testimony submitted this week to the House Ways and Means Committee, Michael Fagan, former federal prosecutor for the Eastern District of Missouri, argued vigorously against Rep. Frank's proposal.

"Having familiarity with the polar extremes … of attitudes on this issue, and having inside and lengthy experience with Internet gambling as it been practiced in the U.S. and elsewhere for the past approximately 15 years … I am absolutely convinced that any action, however well-intentioned, by this Committee or by Congress, which would enable the expansion of Internet gambling in the U.S. will prove far more costly than maintaining the status quo," Fagan wrote. "It would be irresponsible to take any steps toward expanding the availability of Internet gambling."

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